Engineering software group Aveva (LSE: AVV) this morning released a trading update ahead of its AGM. The company, which yesterday caved-in to pressure from shareholders to withdraw a share-awards plan for senior employees, said it had made a solid start to its new financial year and that the full-year outlook remains in line with the Boards expectations.
The shares edged higher in early trading to above 2,000p, taking its gains to 60% since a multi-year low in February last year.
Doesnt move the dial
Avevas core end markets of Oil & Gas and Marine, which together account for over 60% of group revenue, have been in a cyclical trough over the last three years. However, the company confirmed today the early signs of improvement in Oil & Gas that it had noted in its annual results in May.
This, together with the full-year in-line outlook, means there should be little, if any change to analysts forecasts. Indeed, the fact that the shares have retreated towards yesterdays closing level of 1,975p, as Im writing, shows that todays update doesnt really move the dial.
Earnings upgrades needed?
The City consensus is for an 8% increase in earnings to 72.2p a share, giving a price-to-earnings (P/E) ratio of 27.4 and a price-to-earnings growth (PEG) ratio of 3.4. These are high ratings and they remain elevated at 25.6 and 3.7, respectively, when we look ahead to forecasts for the companys 2018/19 financial year.
Aveva is a sound business with a strong balance sheet net cash has increased to 152m from 131m over the past three months but it looks to me as if wed need to see upgrades to earnings forecasts for the shares to move materially higher from their current level.
Prodigious demand
In contrast to the headwinds Aveva has faced, another FTSE 250 tech firm, Sophos (LSE: SOPH), has enjoyed a backdrop of prodigious demand in its area of business.
This cyber-security solutions group has seen its shares soar from an IPO price of 225p in July 2015 to a current 438p, giving it a market cap of just over 2bn. The latest leg-up came after it posted forecast-busting 2016 results in May.
Attractive ratios
For 2017, the City is expecting to see revenue of $628m (487m at current exchange rates), rising to $732m (567m) in 2018. This gives a price-to-sale ratio of 4.2, falling to 3.6, which strikes me as attractive for a company whose top line is advancing strongly.
Turning to the bottom line, earnings are forecast to leap 43% from $0.07 (5.4p) a share to $0.10 (7.7p). The resulting P/Es of 81 and 57 are markedly higher than Avevas, but Sophoss much higher forecast earnings growth gives it a far more appealing PEG of 1.3.
Flattering highlights
Not that the companys management shouts much aboutsuch standard numbers as revenue and earnings. Instead they headline things like billings (significantly higher than statutory revenue) and other flattering metrics likecash EBITDA and unlevered free cash flow.
While this irks me (and couldbe viewed as a red flag), City analysts appear to have no concerns. Of nine brokers tracked by financial website Digital Look, seven rate Sophos a strong buy, one a buy and one is neutral.
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